Why Sensex rise stokes hope on fund flow

Assets under management (AUMs) of offshore India-focused equity schemes and exchange traded funds (ETFs) last month, when the Sensex was just below the 20,000 mark, were almost 34 per cent or $19 billion lower than in the same month of 2010, when the index was around the same level.

Optimists say the data suggests room for further inflow into these funds, which would in turn find its way into Indian stocks as the government aims at attracting more foreign investments. Finance Minister P Chidambaram happens to be readying for a week's global tour to woo foreign investors, to attract more money into the country's equities.

AUMs of offshore India-focused equity funds and ETFs were $37 bn as on December 31, compared with $56 bn in 2010, according to fund tracker Morningstar India.

"India-focused funds could see inflows this year, as investors will now start focusing on countries which will outperform others," said the head of institutional sales of a foreign broking entity.

Foreign institutional investors (FIIs) have bought local equities worth $2.4 bn (nearly Rs 13,000 crore) this month till date, after pumping almost $25 bn (nearly Rs 1.35 lakh crore) in 2012, aided by a loose monetary policy adopted by the US Federal Reserve. The inflows last year were led by emerging market and Asia-centric funds, which invest in India as part of the overall regional investments, said Dhruva Raj Chatterjee, senior research analyst, Morningstar.

The Sensex was around 20,000 in both December 2010 and 2012.

What makes market participants more optimistic this time is that the confidence on economic and corporate earnings prospects improving is much higher now. Optimists believe these factors could drive more flows into offshore India-focused funds this year, after seeing $1.8 bn of outflows in 2011. Flows in or out of such funds are a stronger indicator of foreign investor sentiment on India because money usually flows into these funds only when the undertone is positive.

"The finance minister's tour to meet investors is certainly being viewed as a serious attempt to attract more flows. This could have the desired effect but the real impact will be seen only in the medium to long term," said Nimal Jain, chairman of India Infoline

However, sceptics believe the possibility of FIIs pouring money into India this year, as in the previous year, appears bleak. "It may be too much to expect huge inflows into Indian stocks in 2013 after the 25 per cent returns in 2012, though sentiment has improved. Any indications from the US Fed that it has gone a bit too far in monetary easing would be enough for investors sitting on profits to square off their positions," said U R Bhat, managing director, Dalton Capital India.

Offshore India-centric funds witnessed outflows worth $25 bn in 2011, after the Sensex returned almost 20 per cent in 2010.